MADRID, Jan 30 (Reuters) - Spain's Jazztel will offer its Internet customers up to 200 euros ($270) to cover penalty fees if they switch mobile contracts to the telecoms firm, company sources said, fuelling a price war that has escalated in recent months.

It is a sign of how Spain's telecoms companies, led by Telefonica, are seeking to bundle fixed, mobile, Internet and television services to stem falling revenue in a deep recession.

Cash-to-switch offers are used by other utility companies, such as power providers, and Orange Spain offers a 10 euro discount on a smartphone and 20 percent off six bills for mobile clients switching to the operator.

"It's not a normal offer, it's an offer to increase client loyalty and it's being carried out on an individual basis," one Jazztel source said.

The money is for new mobile clients to pay any penalty for cancelling existing contracts.

In recession-hit Spain, where more than a quarter of the workforce is jobless, competition between mobile operators to hold onto clients is increasingly intense.

Jazztel is the first operator in Spain to offer this kind of deal, though other operators may offer incentives to switch on a more informal level when customers call to cancel. These marketing tactics are common in the telecom industry but are not typically disclosed.

Smaller operators, such as Teliasonera's Yoigo and Jazztel, are gaining clients at the expense of top players Telefonica and Vodafone.

According to data from Spain's telecoms watchdog, Telefonica's share of the mobile market shrank to 36.6 percent in November 2012 compared to 40 percent a year before, while no.2 operator Vodafone's market share fell to 26.8 percent from 28.1 percent.

Virtual operators, such as Jazztel, which do not have their own mobile networks but rent them from other operators and usually offer discount prices, increased their share of the market to 8.8 percent from 6.3 percent.

Jazztel more than doubled the number of mobile clients it had in 2012 to 343,000 at end-December from 143,000 the year before. Over 100,000 new customers signed up with the company in the last quarter of the year.

The offer is being directly marketed to certain clients who already have a Jazztel ADSL internet connection and a mobile contract with another company.

"There's a limit of 200 euros and it will depend on the client," the source said.

Former monopoly Telefonica lost over 2 million mobile connections since it stopped subsiding smartphones last spring. Vodafone, which is in talks with labour unions to dismiss just under a quarter of its workforce in Spain, brought back subsidies following a client exodus.

Jazztel has fared better than its peers in the economic downturn, posting a 22 percent rise in nine-month revenues to 669 million euros.

Its share price has risen 28 percent over the last year to 5.3 euros. That compares with Telefonica's 17 percent drop to 10.9 euros in the same period.

Telefonica introduced a bundled service offering broadband, television, internet and mobile in October, and signed up 1 million customers in under three months. Other operators including Vodafone and Orange have fought back with similar deals.